Justices to Wade Into West Virginia Tax Exemption Fracas

(CN) – The Supreme Court agreed Monday to decide whether Whether West Virginia can exempt the retirement benefits of some former state law-enforcement officials when it does not give the same exemption to former federal marshals.

As recounted by James Dawson in his petition for a writ of certiorari, Dawson worked as a deputy U.S. Marshal before receiving a presidential appointment as U.S. Marshall for the Southern District of West Virginia.

Shortly after his appointment, Dawson enrolled in the Federal Employee Retirement System and then sought a
West Virginia tax exemption for all of his FERS retirement income.

The West Virginia State Tax Department denied his exemption, explaining that under West Virginia law, Dawson was entitled to exempt only a portion of his FER income from state taxes.

Dawson appealed to the West Virginia Office of Tax Appeals which affirmed the tax commissioner’s denial of a full exemption for his federal retirement income. Dawson responded by appealing to the Mercer County Circuit Court, which reversed the Office of Tax Appeals ruling, holding the decision violated federal regulations and the doctrine of
intergovernmental tax immunity.

It also held the decision was contrary to the U.S. Supreme Court’s ruling in Davis v. Michigan Department of Treasury in which the high court held that a Michigan statute that exempted from taxation all retirement benefits paid by the state or its political subdivisions, but levied an income tax on retirement benefits paid by all other employers, including the federal government, violated the doctrine of intergovernmental tax immunity and other federal regulations.

The Tax Commissioner appealed the circuit court’s decision to the Supreme Court of Appeals of West Virginia, which reversed the circuit court’s decision, holding that the statute did not violate the doctrine of intergovernmental tax immunity.

As is their custom, the justices did not explain their rationale for taking up the case, but in his petition, Dawson noted that after Davis, three state courts of last resort struck down tax laws that discriminate against federal employees, but three state courts of last resort have upheld such laws based on an extremely narrow and strained reading of Davis, while many other state courts of last resort have inconsistently ruled on related laws.

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